There’s a VC adage that in any new market, the start-up that emerges as the leader will be richly rewarded. The number two player attracts the would-be acquirers of the number one player, generating a decent return for employees and investors, and the number three player has a chance of generating a modest return. Beyond these top three, it generally doesn’t end well.
Naturally, all investors want to bet on the number one player, but in the early stages, it’s tough to predict which companies will solidify their position at the top. Nascent B2B categories can take several years to take shape. For instance, today’s accepted markets like NoSQL or marketing automation were amorphous and uncertain six or seven years ago.
Long before something can be declared a category or even a “space”, we typically see a few companies with varying strategies and products working in the same general area. Each has some market validation in the form of beta customers, partners or downloads. Determining the top player becomes easier by the time the company raises a later-stage round of financing, but with higher valuations at that point, the potential return diminishes.
So how do we identify a front-runner? At the early stages, we’re looking for a company that is making itself synonymous with an emerging category, thus ensuring that potential customers will always consider their product.
Easier said than done. Defining a category is a risky and often expensive endeavor. Even if you have a great product and an extraordinary technical team, market timing and product fit have to align with your efforts.
For B2B startup leaders who think they have what it takes, here’s our playbook for defining a category, gathered through working closely with a couple companies—Right Media and Blue Kai—that have done it successfully.
Evangelize your vision like crazy
The founder or CEO of an early stage company needs a strategic vision and an obsession with storytelling. He or she must be able to credibly paint the future.
I remember how Right Media founder and CEO Mike Walrath would draw his vision on a white board outlining the future of online advertising, what later became known as “the advertising exchange,” with Advertisers, Networks, and Publishers all working in real-time to match the best ad with the best impressions (see diagram below).
An early sketch of Mike Walrath’s ad exchange model
After hearing Mike’s pitch for the first time, we were so convinced as investors that he had the right stuff, we canceled our meetings for the following day and jumped on a redeye to meet with him in New York. He must have drawn those A’s, N’s and P’s hundreds of times, in the process convincing the entire industry that an ad exchange was inevitable and that Right Media would be the leading player in this emerging market.
Similarly, BlueKai CEO Omar Tawakol could deftly articulate to marketers and publishers why audience targeting was the future of online advertising, and that they would need a Data Management Platform (“DMP”), a term he first coined, to capture the benefits of audience-based campaigns. Omar had that rare skill of taking complexity (“cookies, tags and taxonomies”) and turning it into straight talk about value for marketers.
Enlist an influential customer
Early on each company used its vision and conviction to win marquis customers that at first glance might look crazy to be betting on a scrappy startup. Right Media signed up social networking pioneer MySpace.com early on, and then Yahoo soon after. Blue Kai convinced leading marketers such as HP and Microsoft to bet on Blue Kai’s DMP at the formative stage of the company.
The next step was to enlist these high-profile customers to spread the word about the problem they were facing and the needs of the broader ecosystem, thus raising awareness of the category.
In its early days BlueKai was in talks with a major carrier but that carrier’s business team couldn’t convince its privacy team to get on board to close the deal. That same year Omar found himself on a privacy panel at a major event with that carrier’s chief privacy officer. This chief privacy officer was surprised to see Omar call for the industry to provide more transparency and control to users. Immediately after that panel discussion, Omar received a phone call from the carrier’s business team conveying that the privacy group had given the green light to work with BlueKai without issuing an RFP. In sum, BlueKai’s strategy to be proactive in communicating its vision in the early days helped them close deals with some major customers.
Media coverage then ensued about these major customers which brought attention to the industry’s problems—and moreover of their chosen solutions— which helped the startups begin to define their category. Right Media minted the term “advertising exchange,” and Blue Kai chartered the term “data management platform.”
Create an industry forum to rally the key players
After gaining customer momentum, each company created and gathered key industry players at its own flagship conference – Right Media’s Exchange Summit and Blue Kai’s Data Summit – where early partners and customers told stories that validated the leaders’ visions.
These events raised awareness of each CEO’s thought leadership. Soon, they were invited to events where they could discuss the market space they’d defined in broader circles. Greater name recognition led to more media coverage, which in turn led to more market-leading awareness.
Eventually, each startup’s space became a market, and a line item on prospective customers’ budgets and strategic agendas, with Right Media and Blue Kai at the top of the short lists.
At this point in the category-defining process, more established companies in search of growth and leadership came knocking as potential acquirers. They were willing to pay a premium for the early category leader and, moreover, for the articulate visionary they hoped could spread pixie dust on their own strategy.
This all happened between 2005 and 2014, in the nascent days of what is now a well-established online-advertising ecosystem. Today, I’m energized to see the same patterns emerging within the mobile marketing and commerce spaces with startups like Redpoint portfolio companies Button and Looker, and others like Segment and Tune.
Who do you see out there creating and defining an early category today? Please drop me a line at email@example.com.